Bharti Airtel: Performance impacted by one-offs

Bharti Airtel's consolidated performance for the December 2012 quarter looks poor with revenues flat at Rs 20,254 crore and net profit down about 61 per cent to Rs 284 crore, compared to the September 2012 quarter (Q2). However, the performance was impacted by one-offs, and a rise in network operating costs. Bharti benefited by Rs 600 crore in Q2 due to favourable TDSAT ruling on certain inter-connect agreements. In the December quarter, it incurred forex loss of Rs 248 crore (against Rs 25 crore in Q2) and its African operations also saw a tax outgo jump.

Ankita Somani at Angel Broking says, "Bharti's revenue and operating margins came broadly in-line with estimates, but the company disappointed on the bottom line because of higher interest charges, forex loss and higher tax." Adjusted for these, revenues are up three per cent sequentially and earnings before interest, tax, depreciation and amortisation (Ebitda) margins up 100 basis points, estimates Somani; while reported margins are down 70 basis points sequentially to 30.6 per cent.

Operationally, the performance of mobile business (over 80 per cent of revenues), saw an improvement, both in India and Africa. While the net subscriber base is down four million sequentially to 182 million in India (partly due to disconnection of inactive subscribers), Bharti's average revenue per user is up 4.5 per cent to Rs 185 per month driven by increased voice (up three per cent) and data (25 per cent) traffic as revenues per minute remained largely stable. Similarly, with competitive intensity easing a bit, mobile customer churn in India fell sharply to 5.9 per cent from 8.5 per cent in the September quarter, helping curb selling expenses.

In Africa, although realisations were down marginally, the customer base continues to grow fast and so do voice and data traffic, thereby driving top line growth. Importantly, the business continues to generate healthy operating free cash flow (Ebitda minus capex). This has averaged at over $120 million in the first three quarters of FY13 compared to $17-44 million in the last two quarters of FY12. Thus, the operations have been able to self-finance growth and pay for debt. While Bharti will continue to invest in Africa, it believes there is scope for improving operational efficiencies, which should reflect in the coming quarters.

Domestically, too, tariffs are expected to rise, going ahead, as telecom operators withdraw discounted rates. According to estimates, there is a huge gap of about 50 per cent between listed (60-90 paisa per minute) and realised prices. However, any reduction will only be very gradual.

With incremental capex also coming down, Bharti's overall numbers and cash flows should hopefully improve from hereon. Bharti's management also believes the worst seems to be getting over (in India). On the flip side, an unfavourable outcome in the recent case against DoT's demand of Rs 5,201 crore as one-time spectrum fee could hurt. Also, the forthcoming spectrum auction is a key monitorable. These may prove to be near-term overhangs for the stock, which is up 35 per cent since September last year to Rs 331.